EIGHTEEN
For most of the climate change era, the business and finance community has been the biggest impediment to action. With few exceptions, the moneyed interests saw actions to prevent climate change as saddling businesses with more costs, more red tape, more penalties, and depressed profit margins. The more enlightened leaders gave lip service to the threat, but the fossil fuel–related interests dominated the corporate/financial narrative on climate change. Then, in the 2010s, the business and financial communities started to catch up, and very rapidly.
The change is still ongoing as of this writing, but the momentum is undeniable, and the evidence is everywhere. While in the 2000s, coal production in the United States increased during the fossil fuel–friendly administration of George W. Bush, in the late 2010s, even attempts to mandate coal use by the Trump administration could not stop the decline of the fuel. Nor could Trump’s hostility to renewables stop their rise. In 2020, renewables accounted for about 20 percent of power generation in the United States and for the first time equaled the contributions of coal and nuclear.
The financial markets that direct the flow of capital weighed the prospects of fossil fuel companies against renewables and decided where the future lay. Coal plants became unfinanceable, and scores of oil companies went bankrupt by the end of the decade. In October 2020, NextEra, a power company and the world’s largest public company focused on solar and wind, had a larger market capitalization than Exxon, once the largest company on the planet. To complete the indignity, Exxon was kicked out of the Dow Jones Industrial Average. Goldman Sachs projected in late 2020 that by the end of 2021, investment in renewables would surpass investment in oil and gas drilling for the first time ever.
In January 2021, Tesla had a market capitalization of $700 billion, which made it more valuable than Volkswagen (which includes Audi, Bentley, and Porsche, among others), BMW, Daimler, Toyota, Honda, General Motors, and Ford taken together, despite the fact that these companies sold about one hundred times more cars than Tesla did in 2019. The Tesla valuation was absurd, but it was also solid evidence of where investors thought the future of autos lay. Nikola, an all-electric truck start-up, went public and at one point sported a $10 billion market cap without having made a single vehicle.
Now the major car companies are all jumping on the electric vehicle bandwagon. In 2020, Volkswagen announced it would spend $86 billion on EVs over the next five years. Porsche, Audi, and Mercedes all announced new EVs as well. At a conference sponsored by Barclays Capital in November 2020 (as reported by The New York Times), Mary Barra, CEO of GM, said during her remarks, “Climate change is real and we want to be part of the solution,” going on to say that GM wanted to lead in the production of electric vehicles. Then in early 2020, GM made the dramatic announcement that its vehicle fleet would be all-electric by 2035. (While such commitments from a major carmaker are welcome and significant, it should be noted that GM began experimenting with electric vehicles—the EV1—twelve years before the first Tesla came onto the market. GM discontinued the EV1 in 2002, a year before Tesla was founded and six years before the first Tesla was sold.)
Also, it should not be forgotten that before its conversion to electric vehicles, GM spent more than a decade fighting action on climate change. It was a founding member of the Global Climate Coalition, the lobbying group formed in 1989 to delay action on global warming, and only withdrew from the organization in 2000, after membership became an embarrassment. Even as it announced its commitment to EVs in 2020, GM supported the Trump administration’s efforts to roll back California’s strict fuel economy standards and only dropped their support once Biden was elected.
Indeed, at the time, GM’s early, feeble efforts to develop electric vehicles seemed more designed to prove that EVs weren’t practical and had little market appeal. Its conversion to the cause of climate change may have more to do with the fact that it has been humiliated in the marketplace by Tesla, which investors viewed at the end of 2020 as ten times more valuable than GM.
The new momentum of climate action has made for some strange bedfellows. Southern Company, another founding member of the Global Climate Coalition and former funder of climate denialism, joined forces in 2020 with Tesla, Uber, Duke Energy, and other heavyweights to form ZETA, the Zero Emission Transportation Association, to lobby for tax and other incentives to support EVs. Southern hasn’t cut its ties to coal or coal lobbying. As of this writing it remains a member of the American Coalition for Clean Coal Electricity and several other groups pushing back against the global warming consensus (one of the coal groups describes CO2 as “plant food”). Indeed, even as the company pushes EVs through ZETA, it also (through a subsidiary) funds the American Legislative Exchange Council (ALEC), a special-interest group that supported the Trump administration’s rollbacks of every previous initiative related to climate change.
Expect such internal contradictions to become increasingly common as industry transitions from seeing climate action as a threat to seeing it as an opportunity. While strategic groups within a company might find opportunities in the trends toward renewables, those tied to legacy assets will continue to try to protect their options. Thus, while the Southern Company brags on its website about its commitment to “carbon-free and carbon-neutral energy sources” and cites that 15 percent of its electricity now comes from renewables, through its support of ALEC, it lobbies against mandates for renewables, even though the company’s own goals are not much different from the Californian mandate, one of the most aggressive in the country.
Money flows can create a self-fulfilling prophecy. When investors flock in, companies can spend on R & D and innovate and thereby extend their advantage. As they grow, they hire workers and increase their spending, which, in turn, gets the attention of local, state, and federal politicians, increasing the political clout of the alternative energy lobby. Renewables accounted for virtually all job growth in the electric power sector in recent years.
Examples of this feedback loop abound. A New York–based fuel cell company named Plug Power builds hydrogen power systems for vehicles. It scrambled for money during most of its first eighteen years of life as a public company. From 2010 onward, its share price never got out of single digits. The stock started 2020 at $3.23 a share. By mid-January 2021 it reached $70 a share, giving the company a $31 billion market cap, up more than 2,000 percent in little more than a year (the share price has since retreated, but, as of this writing, remains close to ten times what it was at the beginning of 2020). On the way up, the company filed for a secondary offering to bolster its liquidity. With part of this windfall (nearly $900 million), Plug plans to build what it calls the “Gigafactory” to greatly expand its ability to build fuel cell stacks, and the prospect of new jobs in a struggling part of the state had both Senator Chuck Schumer and New York governor Andrew Cuomo offering incentives and touting the advantages of building the factory in New York.
If money is flowing into one sector, it’s also usually flowing out of another. James Murray, writing for NS Energy, noted that fifty coal companies have filed for bankruptcy in recent years. This was predictable, but even gold-plated fossil fuel companies have suffered. Saudi Aramco, once the world’s most profitable company, struggled to find investors for its IPO in 2019. It had to threaten and bribe investors to get the IPO done, and now it is going deep into debt to pay the $15 billion quarterly dividend it was forced to offer in order to entice reluctant investors. In 2020, Aramco started selling interests in subsidiaries as its profits cratered during the COVID pandemic. Chevron, an oil company with one of the strongest balance sheets of any company in the world, saw its stock pummeled in 2020, even though the oil giant had consistently raised its dividend for thirty years.
The renewable boom has similarities with the dot-com bubble of 2000, which, of course, went bust. In the aftermath of the first tech bubble, however, the solid companies survived and for the past several years have been the dominant forces in the equity markets. Google wasn’t even a public company in 2000 when the bubble burst. Something similar may happen with renewables as it is clear that some valuations have become irrational. Unlike the first explosion of the dot-com bubble, however, a lot of alternative energy and EV companies are either profitable or well along the path to profitability.
The money flowing into renewables is consequential, as is the money flowing away from fossil fuels. There have been several false starts for renewables before—in the 1970s, when the Carter administration offered tax credits to spur energy independence; in the 1980s; and smaller blips since. For several reasons the current boom will likely have staying power: because many renewables can compete head-to-head with fossil fuels even without subsidies; because imaginative pricing and financing innovations solve the problem of upfront capital costs for both users and suppliers alike; because technological innovations and advances in battery technology are well on their way to solving the problem of storing renewable energy when the sun sets and the wind dies; and, most important, because the economic damage already being caused by climate change provides a constant reminder that the world must reduce its reliance on fossil fuels.
If the business and finance community focused more on the costs of dealing with climate change for the first decades of the climate change era, that same community during the 2010s shifted to focusing on the economic threat of climate change itself. Some of the first shots were fired early in the decade. In 2014, Illinois Farmers, an insurer affiliated with the European giant Zurich Insurance Group, filed nine class action suits against municipalities in the Chicago area for losses the company sustained when extreme storms caused sanitation systems to back up, showering the interiors of hundreds of homes with sewage. The suit explicitly said that officials in these towns were aware that climate change would bring more extreme weather but failed to take any action to adapt to the new reality. Ultimately, Illinois Farmers withdrew the suits, noting that they had achieved their objective.
The suit served notice that insurers were not going to passively accept risks passed on to them by municipalities. It also underscored one of the profoundly difficult issues of pricing the risk of climate change. Ostensibly, Illinois Farmers was acting on behalf of the homeowner victims, but had they pursued and won the suit, the increased costs incurred by the municipalities would almost assuredly be passed on to those same homeowners through increased taxes or fees.
And then there were the wildfires. In 2017, California’s fires wiped out premiums collected in previous years going back to 2001, according to a study by the RAND Corporation. Once again, there commenced a game of pass the hot potato. Insurers responded to the losses by dropping more than 235,000 homeowner policies in 2019, up 61 percent over 2018. After another disastrous fire season, in December 2019 the state imposed a moratorium on cancellations of policies for zip codes that covered more than 800,000 homeowners. In areas not covered, homeowners saw their insurance costs increase between three and four times, according to Amy Bach, founder of the nonprofit United Policyholders. After California’s worst fire season in history in 2020, the state imposed a new one-year moratorium on cancellations in November 2020 that covered 2.1 million insured residences, or about 20 percent of the entire market. The year grace period was supposed to allow homeowners to fortify their homes against fires and/or find new coverage, but after the year, insurers were free to drop coverage. Doing that forces homeowners to buy the bare-bones coverage offered by the state’s California FAIR Plan (CFP), a pool backed by all the state’s insurers.
With desperate homeowners flocking to this last-ditch backstop each year, a crisis is brewing. The CFP cannot raise rates more than 100 percent at any given time. As more insurers pull out of the California market or drastically raise their rates, the prospect of a CFP bankruptcy becomes more likely should the state’s catastrophic fire seasons continue. Watching all this carefully will be the banks, which are loath to take on uninsured or underinsured risk when writing mortgages. Watch home prices for an early indicator of a coming housing/banking crisis related to the fires.
On the opposite side of the country, in Florida, housing sales have already begun to fall for homes at risk of flooding. A study by the National Bureau of Economic Research focused on slowing sales as an early warning of housing price drops. In past housing crises, at first buyers are reluctant to pay up and sellers reluctant to drop prices, which results in slower turnover of housing stock. At some point the sellers blink, and prices begin to drop. The slowed sales began in 2013. As quoted in The New York Times, the NBER study attributes this inflection point to the shock of 2012’s Hurricane Sandy, which awakened hundreds of thousands of northeasterners—major buyers of Florida real estate—to the perils of flooding. While prices and sales in areas of Florida at low risk of flooding continued to rise, both prices and sales dropped in high-risk areas.
Now insurers have to grapple with yet another threat of rising seas. As of this writing, it is still not clear what led to the horrific collapse of the Champlain Towers South condo complex in Surfside, Florida, on June 24, 2021, but insurers, not to mention government officials, inspectors, regulators, and, most of all, residents, now have to worry about whether ever more intrusive seawater is corroding foundations and changing the subsoil on which buildings have been constructed. Did changes in the composition of the ground underneath the tower contribute to its instability? Given the massive increase in construction along the coasts, the ubiquity of sea level rise, and the difficulties of examining the ground underneath completed buildings, this represents a monumental, if essential, task. The problem is that such an investigation needs to be done to determine the present safety of existing structures, and also their future viability as sea levels continue to rise.
There are other derivative impacts that amplify the economic damage of disruptive events such as climate change. To put it simply, both people and businesses will try to game or otherwise take advantage of the situation. Some insurers will use the increased frequency of storms to raise rates more than is justified by the risk. Some people will take advantage of an event like a storm to collect for damages that may not relate to the storm. Indeed, in what might be called a second-derivative impact, some insurers in Florida justified rate raises by claiming that rampant insurance fraud and frivolous lawsuits deriving from hurricane-related claims were threatening their very viability.
These shenanigans, however, camouflage the serious dilemma that derives from both California’s fires and Florida’s floods: if either risk was priced to the risks of climate change, insurance (and housing) would become unaffordable for large swaths of the public. There are legitimate social issues involved in keeping fire and flood rates low. Barry Gilway, the CEO of Florida’s government-backed property insurance company Citizens, told the Financial Times that given the susceptibility of the Florida Keys to flooding, true pricing and/or flood-proofing of existing homes would make housing so expensive that the employees who service the area’s economic engine—the tourist industry—could not afford to live there.
Similar stories can be found in every at-risk community. This is one reason that FEMA has been slow to update its flood maps to reflect the rising threat of climate-change-related floods. Flood maps compiled by the First Street Foundation estimate that 14.6 million properties are at risk for a hundred-year flood in the United States, nearly twice the 8.7 million properties identified through federal maps. If a house is in a federal flood zone and the owner has a government-backed mortgage (as most people do), they are required to have flood insurance. Many neighborhoods on the fringes of flood zones are occupied by people barely getting by, and the cost of flood insurance might make their homes unaffordable.
Analogous to the tug-of-war over flood maps is a struggle going on right now in California as it seeks to update its severe-fire-zone maps to more accurately reflect risk in an era of climate change. As is the case with flood maps, there are real economic consequences to changing these maps as the state imposes stricter building codes and other impediments to living in areas judged to be at severe risk. The combination of higher building costs and higher insurance rates would very likely make housing costs rise to unaffordable levels for many people who suddenly find themselves in a zone newly designated as severely at risk for wildfires.
Reality will likely settle this conflict between accurately pricing risk and accommodating the needs of those who live in at-risk areas. Between rising sea levels; increasing numbers of epic rainfalls; increased incidence and severity of windstorms; increased frequency, severity, and extent of wildfires; and increased temperatures and wet bulb temperatures, large swaths of the United States will likely become either unlivable or economically unviable.
An ambitious project published in September 2020 by the nonprofit ProPublica and The New York Times Magazine used data and analysis from the Rhodium Group and other sources to project how climate change might transform the United States if it proceeded along the lines of the various scenarios compiled by the IPCC. The authors, Al Shaw, Abrahm Lustgarten, and Jeremy Goldsmith, compiled data for every county in the United States and assessed each county for its risk on a scale of one to ten for each of five different climate change impacts—temperature, wet bulb temperature, farm crop yields, sea level rise, and very large fires—and then came up with a number for economic damage for the period 2040 to 2060.
The resulting maps suggest that some of the most thriving counties in the United States will likely suffer extreme economic damage in the coming decades. Palm Beach and Miami-Dade counties in Florida had an economic risk of eight on the scale of ten. Beaufort County, South Carolina, home to the famed Hilton Head resort island, scored a nine on that same scale, thanks to a combination of future sea level rise and extreme wet bulb temperatures. A good number of the counties most at risk for economic damage had moderately high risks in a number of categories but scored high for extreme economic damage because of the anticipated compounding factors as risk stacked upon risk. There were also a number of counties, mostly in the Northeast, that will stand to benefit economically from these changes as climate refugees migrate northward.
The authors were wise enough not to put specific numbers on these predictions, but their basic points are well taken. If wet bulb temperatures create outdoor conditions that are unlivable, as is the prediction for ten parishes in Louisiana, or if outdoor temperatures are predicted to be so high as to be unbearable, as predicted for a number of counties in Texas, Arizona, California, and other states, or if much of your county will likely be underwater, or if farming is no longer viable, it is also likely that large numbers of people will pull up stakes and move. And when they move, their homes will be unsaleable, the mortgages will default, some banks will go under, and the tax base will disappear.
This scenario might have been avoided had the nation begun to adjust for the new risks when the threat was first recognized. And it still might be moderated were the United States to accelerate its adjustment to climate change risks going forward. To a large degree, however, many climate change risks are not priced in, sometimes for quite practical reasons (such as the need for affordable housing for local workers), making it ever more likely that when these risks surface, the eventual adjustments will be violent and disruptive.
Our modern market economy is so ingenious at spreading and hiding risk that its very adaptability has become a threat to its future. Our society is so good at monetizing discontents (think MAGA hats) and finding profit opportunities that its very adaptability has become maladaptive. We are so gifted at finding the profit to harvest in every risk and at pushing off the day of reckoning that, as a society, we have lost the ability to recognize and adjust to true danger. The role of politics and the insurance industry in relation to global warming offers a case study of this paradox in real time. The net effect of slicing, spreading, and camouflaging the risks of fire, flood, drought, and heat attendant to climate change has been to maintain the status quo and reduce any impetus to adjust to these threats.
The 2010s saw the business community begin a momentous shift toward weighting the costs of climate change over the costs of efforts to moderate its effects. It also saw the moneyed interests dramatically increase their investments in clean tech and other opportunities climate change might offer. In this sense, the clock of business and finance, which used to lag the public, the scientific community, and reality, is now running ahead of the public and just behind the scientific community. Since money drives the system, it’s a welcome trend. But can it catch up fast enough to make a difference in our future?